By TIOL News Service

MUMBAI, JUNE 08, 2016: THE issue is - Whether disallowances can be made towards expenses incurred on account of leasehold improvement expenditure, even without appreciating the fact that the expenditure were incurred by the assessee on leasehold premises to make it more conducive to its business activity. NO is the answer.

Facts of the case

The assessee is company is engaged in the business of supply of formwork and scaffolding material. AO noticed that the assessee had shown expenditure of Rs.9,00,511/- on account of leasehold improvement. This amount was spent on the premises which was taken on lease towards repairs and furnishing. The claim of the assessee was that this amount has been spent on repairs and was claimed as deduction u/s 30(a)(i) and that the intention was not to bring about any new capital asset. It was stated that the expenditure was incurred on repairing the premises taken on lease so as to make it more conducive for business activity. The explanation so given by the assessee to AO, however, did not satisfy AO, who noted that Explanation-1 to section 32 provides that "where the business or profession of the assessee was carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure was incurred by the assessee for the purpose of the business or profession on the construction of any structure or doing of any work or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee." AO was of the view that in view of this specific provision, the expenditure in question was required to be treated as capital expenditure. AO was further of the view that such a huge expenditure cannot be categorised as current repairs as claimed by the assessee u/s 30(a)(i). Accordingly, AO proceeded to decline deduction of an amount of Rs.9,00,511/- and granted deprecation @ 5% (being half of 10% i.e. addition made during the second half) which works out to Rs.45,026/- and the balance amount of lease hold improvement i.e. Rs.8,55,485/- was disallowed. On appeal, CIT(A) confirmed the order of AO.

Having heard the matter, the Tribunal held that,

++ expenditure in question pertains inter alia for interior designing, for metal, cement & bricks for mockup, for replacing of tiles and allied expenses. In our considered view, these expenses cannot be treated as capital expenditure, particularly when, given facts of this case, they have limited useful life. As regards AO's reliance upon Explanation-1 to section 32, it could come into play only when the capital expenditure is incurred in connection with a leased premises, but then, merely because it is an expense incurred in connection with the leased premises, it cannot be inferred that it is a capital expenditure. The authorities below have been thus swayed by the considerations which are not relevant. Section 30(a) categorically provides that when a premises used for the purposes of the business or profession, is occupied by the assessee as a tenant and when the assessee has undertaken to bear the cost of repairs to the business, the amounts paid on such repairs is to be allowed as deduction u/s 30(a)(i). As regards the restriction to the effect that only current repairs can be allowed, it is set out in section 30(a)(ii). It refers to a situation when the premises are occupied by the assessee otherwise than as a tenant. Clearly section 30(a)(ii) does not apply to the facts of the case. The assessee was occupying the premises as a tenant. In this view of the matter, it cannot be said that the repair expenses which are to be allowed as deduction when the assessee is restricted to only current repairs. As stated earlier, on a careful perusal of the material before us, we are satisfied that the repair expenses incurred by the assessee, which have been termed as leasehold improvement, are revenue expenditure in nature. In view of these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the amount of Rs.8,55,485/-. Assessee gets the relief accordingly. Ground no.1 is thus allowed. In the result, appeal is partly allowed.

(See 2016-TIOL-966-ITAT-MUM)